Class Certification Rejected in Alleged FDCPA/RICO Suit Against Sherman Financial Group

A federal judge in Indianapolis has ruled that a lawsuit alleging violations of the Fair Debt Collection Practices Act (FDCPA) and the United States Racketeer Influence and Corrupt Organization Act (“RICO”) against Sherman Financial Group, one of the country’s largest debt buyers, cannot proceed as a class action because circumstances vary too much among the class members.

In a decision filed on Friday, January 22, 2016 U.S. District Judge Tanya Pratt said individual proof would be needed for each class member to support their claims that Sherman subsidiaries did not own consumers’ debt when they tried to collect it.

The action was originally filed on November 9, 2012. (Cox, et al v. Sherman Capital LLC, et al. U.S. District Court, Southern District of Indiana, 1:12-cv-01654-TWP-MJD)

The Plaintiffs alleged that Defendants did not actually own their debts when the Defendant and their agents engaged in collection activities against them and the prospective class members.

Plaintiff’s argument hinges upon the practice of “securitizing” pools of receivables.

From the Order:

“Underlying the argument that [Defendants] did not own the Plaintiffs’ debts is the Plaintiffs’ understanding of the effects of “securitization” on the debts. Plaintiffs allege that shortly after a consumer assumes a debt obligation or receivable, the originating bank, through subsidiaries, pools the receivable with others into a financial instrument that can be sold to outside investors, which results in the creation of an asset-backed security. According to the Plaintiffs, the primary results of securitization are:

1. the originating bank is paid in full;
2. the originating bank surrenders all control and ownership including all rights, title, and interest over the receivables;
3. the outside investors own the receivables as result of a true sale;
4. evidence of indebtedness is delivered to the Trustee;
5. the originating bank transforms into the servicer for the asset-backed security; and
6. the originating bank cannot get the receivables back without violating numerous agency rules.

Thereafter, if the consumer does not pay the debt obligation or receivable, the originating bank (which now acts as the “servicer” for the asset-backed security) has 180 days to collect upon the receivable. If the originating bank is unsuccessful, the debt or receivable is considered “charged-off”. When this occurs, the originating bank (servicer) informs the investor who purchased the receivable, and if the investor had a credit default agreement or similar credit enhancement, the investor is paid in full. According to Plaintiffs, once the investor is paid in full, there is no longer a debt obligation. Instead, the only thing that is left over is “data” of the debt or receivable, therefore, the originating bank can only sell the data and not the actual debt.

Despite the Plaintiffs’ description of securitization and its purported effect on their debts or receivables, Defendants claim that they, nevertheless, obtained valid title to each of the named Plaintiffs’ debts directly from the originating banks. In addition, Defendants argue that there is competing evidence to suggest that after a securitized receivable is “written off” by the originating bank, the receivable or debt is automatically removed from the securitized trust and is returned to the originating bank rather than becoming merely “data”.

The opinion discusses the various legal standards for class action certification. But the crux of the decision was that after three years of contentious litigation and extensive discovery the Plaintiffs could not produce evidence that their debts were actually securitized, and thus the Plaintiffs still could not affirmatively demonstrate evidence to establish their primary legal theory in regards to the four named Plaintiffs’ debts.

Judge Pratt wrote:

“If the named Plaintiffs’ debts were not securitized and the Plaintiffs must rely on a securitization theory to establish their claims, then the named Plaintiffs’ claims are not typical of the class. Alternatively, if the named Plaintiffs’ debts were securitized but the Plaintiffs’ attorney cannot demonstrate securitization for even the four named Plaintiffs, let alone a class of tens of thousands of Indiana consumers, the Plaintiffs may not be “adequate” for purposes of class certification.

The case would require an individualized review of the history of each Plaintiff’s debt obligation, from creation and securitization through non-payment, “write-off”, sale, and attempted collection. Because of the significant number of individualized factual issues, the Plaintiffs’ claims appear to be unmanageable as a class action under any definition.”

insideARM Perspective

This case presented a fascinating legal issue regarding the impact of “securitizations” of pools of receivables in a subsequent sale of accounts.  The issue was the subject of extensive legal maneuvering by both parties.  A review of the court docket found 529 docket entries over the past three years. In her opinion the Judge noted, “…..even a cursory review of the procedural history of the case, reveals a history of contentious discovery disputes with ‘wins’ and ‘losses’ on both sides.”

In this case, the potential exposure for Sherman was enormous.  The Plaintiffs asserted that the number of class members could easily number in the tens of thousands, noting that the Defendants collected on over 1,174,222 Indiana consumer accounts between 2008 and 2013. Plaintiff had also alleged that between November 2008 and November 2013, the Defendants collected over $79,940,415.50 on over 1,174,222 Indiana consumer accounts. In addition, over the same period, the Defendants collected another $18,890,420.79 through 33,440 lawsuits against Indiana consumers.

Class action litigation is expensive, for both parties. Assuming this decision withstands any subsequent appeal it appears that Sherman made a good decision to vigorously defend the case.